S&P 500 Proves Too Heavy for Dip Buyers to Hold Up

A defined downside target from a multi-week perspective opens up

Thursday’s 2.11% heavy-volume selloff the S&P 500 INDEX (INDEXCBOE:SPX) arguably brought about the first meaningful day of selling pressure in 2015 that also broke key technical levels.

Much had been made about the 200-day moving average, but in my mind it’s actually the context from other time-frames as well as the structural picture that forecasts a further drop in the index well into the autumn period.

While an oversold bounce or consolidation phase should be expected in the S&P 500, these opportunities now favor entering calculated trades to the short side.

For the better part of the past six years, traders have been conditioned to buy every single dip in the market. Backed by accommodating central banks and a marginal economic rebound dip, buyers managed to keep the S&P 500 tracking higher in an eerily calm manner, particularly in recent years.

However, and as I have discussed in this column for most of 2015, the market over the past 12 months continued to lose more and more support from important sectors and industries. Coupled with slowing economic data (not including housing) in a late cyclical environment and volatility in all other asset classes except for the major U.S. equity indices, this loss of support weakened the S&P 500 so that it was just a matter of time until the dip buyers’ magic one day fails to work.

As the expected afternoon turnaround failed to take hold on Thursday, these overly confident dip buyers fell flat on their faces, stops triggered and implied volatility in the options market spiked even further.

S&P 500 Stock Charts

After it was all set and done, the S&P 500 on the weekly chart below closed Thursday’s trading session right at the 2011 support/trend line, which also coincides with the very low end of the trading range since early February. In fact, the index closed at 2,035 and change, which was about five points below the six-and-a -half-month trading range, which is marked by the blue box on the chart below.

If we look at the monthly S&P 500 chart, we see that the eight-month moving average (blue line) has held as support since late 2011. While the month of August still has another week or so left, it is noteworthy that the index is now below this moving average once again.

Finally, on the daily chart, the S&P 500 broke on decisively below its support line from December 2014 and below the 200 day moving average (red line), which more than anything is just a good psychological reference line. The next major support area now becomes 1,980 to 2,000, which is to say that any bounces or sideways consolidation from here could be used to play the index to the downside using ETFs or the options market.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan,TheEssence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.